China's Currency Issues Continue

Concerns over the value of China's yuan are continuing to surface amidst this week's Treasury report.

Last July, China freed its currency from a decade-old peg to the U.S. dollar, switching instead to a basket of currencies. However, Beijing still exerts a great deal of control over the yuan, which has appreciated less than 2% against the dollar since then.

The Bush administration said this week in a report to Congress that Beijing isn't moving fast enough in currency reform, but fell short of calling China a currency manipulator.

American manufacturers argue China undervalues its currency by as much as 40% against the dollar, which makes Chinese good cheaper for American consumers and American goods more expensive in China.

In a statement form John Engler, president of the National Association of Manufactures (NAM), the organization voiced its disappointment that "the U.S. Treasury Department chose once again not to cite China for currency manipulation. The Chinese yuan has moved only 3.4% since July 2005. That is just not enough."

The Chinese government has amassed close to $900 billion in foreign exchange reserves to suppress pressure on the yuan to appreciate. In recent months, authorities ranging from the U.S. Treasury Department to the International Monetary Fund (IMF), and the G7 Finance Ministers (Canada, France, Germany, Italy, Japan, U.K. and U.S.) have expressed concern about global trade imbalances and have called on China to allow greater flexibility in the value of the yuan.

China has amassed huge reserves of dollars through exporting to the U.S. and in the course of managing the rate at which its yuan is valued against the dollar. It lends the money back to the U.S. by buying huge volumes of Treasury debt.